Entries tagged as ‘dropping knowledge’

Dropping Knowledge: where I “laymenize” an important aspect of social science.

I like the idea of “dropping knowledge” because I can share some of the (extremely expensive) information I’m obtaining via my Ivy experience with my friends who are bored out of their skulls while still in the “working” world.

I feel it necessary to preface every one of these posts with “I’m not an expert” and “I haven’t yet been exposed to all of the sides of this issue.” Nevertheless, I strongly disdain the assumption that one must first be “an expert” to participate in what turn out to be extremely important discussions about the current and future states of affairs of our country and world. Moreover, that’s what the comments section is for.

Wednesday in economics class my professor went on an extremely interesting tangent while discussing the “Wealth of Nations” (specifically Balance of Payments).

Everyone should know, if not understand, that the United States government is running a massive deficit of over $9 trillion dollars. The human brain isn’t wired to understand numbers that big, but it calculates out to about $30,000 per US citizen.

The deficit that is referenced in this instance is related to an economic term called “Government Savings,” which is calculated by taking tax revenue and subtracting government spending, transactions and interest payments. This creates a running balance over all years. Pretty straightforward.

There is another “twin” deficit that most people are familiar with to a lesser extent, which measures the “Current Account” balance of the US. This balance is calculated in several ways, but the easiest way to understand it is as follows: the US imports way more than it exports, it saves (both as a government [see above], and as individual citizens) less than it invests, and it issues bonds to the rest of the world (most notably China and Saudi Arabia) to finance its spending.

The US is therefore the world’s biggest borrower. We borrow from the rest of the world to finance our consumption and government expenditures (including the war in Iraq, which is about 5% of our current annual budget).

What typically happens to borrowers that continue to spend, without the ability to pay of their debts, is that they are slowly denied credit. First their interest rates jump. Then, the money flow stops. Their assets are repossessed and sold. And their standard of living is adjusted downward, accordingly.

It’s a scary thought to recognize that our current standard of living in the US is financed on borrowed time. If at any point China decides that it’s militarily ready to assume the unipoloar position of the world’s hegemon, it could (hypothetically) collect full payment on all of the US treasury notes it’s snatched up over the past decade, and bankrupt the US. 1929 all over again.

So someone asked our professor: should we be worried?

“Yes,” he said.

I was shocked. You never get definitive answers from economists.

Of course, he qualified himself: there are factors in play that make the US a “most favored nation,” and “dark-matter” components that aren’t being factored in when calculating the US’ deficit.

The most favored nation concept is easy enough to understand: China wouldn’t want to financially bankrupt the US, because the US is such a huge, integrated part of the global economy that the world couldn’t sustain its collapse. Moreover, countries continue to consider the US treasury bond the safest way to diversify their portfolios, and can’t invest fast enough (at extremely low rates, by the way).

This foreign investment concept ties into the “dark-matter” factors: the largest of which is cash liquidity. You see, the most diversified of all US liabilities is the dollar note itself: many countries prefer to use the dollar as a stable currency, and the dollar bears no interest. The US is providing a liquidity service to the rest of the world that is not being taken into consideration when calculating the “Current Account” balance above. Moreover, the US provides the rest of the world with various “intangible” services such as intellectual property, higher education and “the American brand.” It seems we haven’t squandered all of our good will by haphazardly starting a war in the Middle East.

So these are the high-falutin issues that economists discuss amongst themselves. They all seem to agree that a high deficit is risky, but there is no consensus of just how risky it really is.

As for myself, I’m one to believe that the Bush tax-cuts have served their purpose in stimulating the economy post-9/11 (even though he proposed them pre-9/11), and that their roll-over nature is extremely dangerous. It’s time to nip this deficit in the bud.

Moreover, there’s a national discussion going around after the census released data showing that GDP was up, but real incomes at all but the highest brackets remained stagnant… and last month saw the first net job loss in God knows how long.

Dropping Knowledge: where I “laymenize” an important aspect of social science.

Sometimes, as in the previous post, I can get pretty whiny, self-entitled, and indignant when I get the vague impression that I’m being shafted in some way or another. (What can I say? I’m the youngest child).

Faithful readers will tell you that one thing in particular that really grinds my gears is uneven and unfair income inequalities within American society (and the world) today. It bothers me that CEO’s can make five digit multipliers over some of their employees, because fundamentally, I don’t believe any single person is ten-thousand times more valuable, by any imaginable measure, than any other given person– especially when you consider that 1 in 6 of the world’s population lives on less than $1 per day. (Note: exceptions include Jessica Alba and Scarlett Johannson… pay them whatever they ask).

I understand that the prevailing normative wisdom will tell you that global and internal income inequality is a necessary evil to drive growth and keep the overall standard of living within the US above the poverty line. In theory, greater income equality takes away the incentive from hard work and productivity (which makes it even more incredible how the egalitarian Dutch can survive by getting high in coffee shops all day every day).

One of the most prevelant methods of measuring and comparing levels of income inequality within and between countries is the Gini Coefficient. (Click the link for a full description). The coefficient is a number between 0 and 1, with 0 corresponding to perfect equality (i.e. everyone earns the same income) and 1 corresponding to perfect inequality (i.e. one person has all of the wealth… I’m rich, bitch!)

Now, the World Bank would tell you that 1) empirical data shows no strong correlation in either direction between income inequality (i.e. high Gini coefficients such as Brazil, US and China) and growth and 2) high degrees of income inequality, especially in developing countries (i.e. Mexico), can be disasterous to the fundamental institutions of government.

You see, it follows logically that the greater the distribution of the concentration of wealth in the hands of the few, the less democratic a society becomes, because the lower- and middle-classes become either disenfranchised or disillusioned with the representative nature of their government.

Lacking regulatory measures, high income inequality allows for a permissive environment of corruption and graft. And extreme degrees of income inequality (such as in Brazil) negatively effect growth because so many people are left poor, unskilled and uneducated that the country runs well below its productive potential.

What does this all mean? Well, as I mentioned before, the accepted theory is that high income disparity is the necessary biproduct of healthy economic growth. In a global context, this means that governments (and their economic advisors and ministries) are increasingly pressured to pursue aggressive economic policies, paying scant attention to the distribution of their country’s wealth, because they are largely acting under the assumption that growth benefits all (i.e. trickle down economics) and that redistributive measures (i.e. progressive taxation) are undesirable because they dampen growth. Overall then, I suppose we should expect to see an upward global shift in the Gini coefficients.

I will say (and I don’t have any empirical data to back this up, it’s just my hypothesis) that while greed and self-interest may be a motivating factor up to a certain level, the returns are diminishing once Maslow’s basic hierarchy’s are met. I believe that successful people work hard for the prestige and power after they’ve obtained the wealth. I believe that nose-to-the-grindstone poverty doesn’t incentivize hard work, but just the opposite: despair and anomie. And I believe that the country that grows together, stays together.

Dropping Knowledge: where I “laymenize” an important aspect of social science.

Seat-belts on. I’m about to enter a stratosphere that is way above my head. Disclaimer, disclaimer, disclaimer.

Ok. Anyone who has ever visited another country for an extended period of time will tell you that one of the major unexpected benefits of travel abroad is learning about your OWN country and culture in the process, via comparison. That is to say, travel gives you a fresh perspective with which you may reexamine how your own society behaves, chooses to organize itself, interacts, etc.

Yesterday when I wrote about Michael Moore’s SICKO, I neglected to mention that Moore uses a similar tactic by introducing middle- and working-class Americans to other countries’ perspectives and systems, so that we might re-evaluate our own preconceptions.

Americans are socialized to believe that they are the wealthiest, most powerful country in the world– that this success is predicated upon our system of government and economy, which ensure freedom and liberty, and allow for equality in opportunity.So it follows that when Americans discover that they aren’t the bees’ knees in major categories which evaluate standards of living, they tend to get pissed off about it.

The “hey look what they have!” is a powerful motivational and emotive tactic.The message elicits a gamut of emotions: pride, surprise, betrayal, anger, indignity – and most of all, jealousy.The fragile human ego cannot tolerate being slighted or unjustly recognized within the hierarchy of society.This “oversight” has been the motivating cause of revolutions from Moses to Martin Luther King, Jr.

The same phenomenon I’ve discussed above from a sociological perspective is termed in Economics as “relative deprivation”: the discontent people feel when they compare their positions to those of other similarly situated and find out that they have less than they deserve. It is a condition that is measured by comparing one group’s situation to the situations of those who are more advantaged. And it’s also known as “unfulfilled rising expectations.”

There’s an important debate going on in our country right now and the heart of the issue is relative deprivation.I’m too much of a simpleton to weigh all of the factors, but I can identify the major variables:Hedge fund managers, protected behind the veil of their privately managed companies, are reaping historically unheard of annual profits.Their massive income is further skewing the distribution of wealth in our country, and pushing social norms (and prices) of luxury goods ridiculously skyward.

Think of it this way:the higher you rise in the income bracket, the less you can accurately evaluate the absolute value of a dollar, because the relative value is so depressed (i.e., you stop understanding the difference between a $20 tip and a $100 tip when you’re wiping your ass with both bills).You can then single-handedly set the price on luxury goods, to make those items truly exclusive.

And when you’re paying eight-figures or for a flat in Manhattan or an estate in the Hamptons which were previously listed in the seven-figures range, it logically follows (and again, I’m no economist) that you’ve dictated the ceiling price for the entire housing market in New York, which then trickles down to schleps like me who are looking for a shared-apartment in Harlem.

If there’s one thing American’s HATE, it’s getting a raw-deal.We expect to be compensated exactly what we deserve, to be able to obtain a certain lifestyle if we dedicate ourselves to achieving it.When the over-class unintentionally takes away our society’s ability to guarantee the “rags to riches” ideal, or at least maintain some potential for upward social mobility, the proverbial shit hits the proverbial fan.